SEARS CANADA INC. SEARS CANADA INC. SEARS CANADA INC. 1997 Annual Report FORWARD THINKING New insights into how Sears gains strength by better understanding customers TRANSFORMING SEARS INSIDE OUT An inside look at Sears $300 million nationwide revitalization program CLOSER TO HOME Sears Whole Home Furniture Stores and dealer stores key to Sears innovative off-mall growth strategy 2 CHAIRMAN’S MESSAGE Paul Walters reflects on 21 FINANCIAL INFORMATION 1997 the gratifying results of 1997, and shares his perspective on Sears strategy for growth 22 Eleven Year Summary 6 FORWARD THINKING Sears reinvents the way it 23 Management’s Discussion and Analysis does business to become more relevant to customers 33 Quarterly Results and Common Share Market 8 BRAND NEW LIFE Creating a brand image for Information and Dividend Highlights Sears helps grow lifetime customer relationships 34 Statement of Management Responsibility 10 TRANSFORMING SEARS INSIDE OUT and Auditors’ Report Revitalization of 9 GTA stores first stage of $300 35 Consolidated Statements of Financial Position million capital investment program to totally transform Sears by the beginning of the new 36 Consolidated Statements of Earnings millennium 36 Consolidated Statements of Retained Earnings 14 THE MANY SIDES OF SEARS Customers see how Sears meets their many needs in new 37 Consolidated Statements of advertising campaign Changes in Financial Position 16 BEST SELLER Sears reveals why catalogue 38 Notes to Consolidated Financial Statements shopping has an exciting future CORPORATE INFORMATION 18 CLOSER TO HOME Off-mall strategy brings 46 Corporate Governance customers closer to Sears 47 Directors and Officers 20 COMMUNITY RELATIONSHIPS Communities benefit from Sears caring side 48 Corporate Information Sears is Canada’s largest single retailer of general merchandise, with department and specialty stores as well as catalogue locations across Canada. The Company emphasizes quality and service in appealing to a broad cross-section of Canadian consumers. The Company’s vision is to be Canada’s most successful retailer by providing our customers with total shopping satisfaction, our associates with opportunities for career advancement and personal growth, and our shareholders with superior returns on their investment. Financial Highlights For the 53 weeks ended January 3, 1998 and the 52 weeks ended December 28, 1996 1997 1996 RESULTS FOR THE YEAR (in millions) Total revenues $ 4,584 $ 3,956 Interest expense 86 96 Earnings from operations before unusual items and income taxes 215 70 Unusual items expense - 45 Income tax expense 99 16 Net earnings 116 9 YEAR END POSITION (in millions) Working capital $ 971 $ 741 Total assets 3,007 2,734 Shareholders’ equity 1,042 949 PER SHARE OF CAPITAL STOCK (in dollars) Net earnings $ 1.10 $ 0.09 Dividends declared 0.24 0.24 Shareholders’ equity 9.84 8.98 Total Earnings (Loss) Shareholders’ Revenues from Operations Equity (Before Unusual items and Income Taxes) 5000 250 1200 200 150 1000 4000 100 50 800 0 3000 -50 600 -100 2000 -150 400 87 88 89 90 91 92 93 94 95 96 97 87 88 89 90 91 92 93 94 95 96 97 87 88 89 90 91 92 93 94 95 96 97 ($ millions) ($ millions) ($ millions) 1 1997 was an outstanding year for our Company. Revenues increased 15.9% to $4.6 billion, contributing to the best performance in our 45 year history. Most importantly, earnings more than tripled and at $116.5 million also represent a new high for our Company. These results are extremely gratifying for all of us as our customers responded to our efforts to improve their shopping experience in the numerous sales and merchandise distribution channels that make us uniquely Sears. A key measure of our success is our strong sales gain in stores open for at least a year. Sales increased 14.7% during 1997, more than double the 6.4% posted by the industry. The dedication of our 39,000 associates from coast to coast is at the core of our success and their satisfaction with Sears as a Great Place to Work continues to improve. We are committed to creating a winning team that treats every person with dignity and challenges them to place customer satisfaction as their top priority in everything they do. LEVERAGING OUR STRENGTHS FOR GROWTH Delivering a superior return to our shareholders is also squarely embedded in our goals, benefiting investors and associates alike. We are especially pleased that Sears shares posted a total return of 98% in 1997. Last year I had indicated in my message to shareholders that the growth of our business was a key focus for us over both the short and longer term. Buoyed by a much improved economic environment in Canada, our strategies to grow our Company and create value by leveraging the strengths that make us uniquely Sears are clearly working. Without exception, all of our sales channels posted strong growth, well in excess of the market. We are focused on the continuous improvement of our business strengths which include our reputation for trust, integrity and value, as well as our excellent store locations, our growing stable of private and national brands and our portfolio of high quality Sears Card charge account receivables. 2 Sears Canada Annual Report 1997 Paul S. Walters, Chairman & CEO SEARS CANADA was an outstanding year for our Company. Revenues increased 15.9% to $4.6 billion, contributing to the best performance in our 45 year history. Most importantly, earnings more than tripled and at $116.5 million also represent a new high for our Company. Sears Canada Annual Report 1997 3 Our continuing challenge is to use these unique resources appliances and lawn and garden equipment, and combine to better serve our target customer and build a lifelong them with our world class brands such as Craftsman and relationship with her and her family. Kenmore. Our strategy here is to continue to grow our market leading share of these businesses by extending our Our full-line store repositioning strategy, launched in the presence further into the market by making store access all-important Greater Toronto Area (GTA) market earlier easier for our customers. this year, is an important example of our commitment to make the Sears proposition more attractive to her on In 1997 we continued the development of our successful every dimension. Sears Whole Home Furniture Stores. We added 4 stores over the past year, concentrating on the Greater Toronto These repositioned stores have performed exceptionally well Area market. both during and after their transformation, and we believe we have a compelling format with which to move forward. In two of these locations we added our Sears Brand Central As a result, in 1998 we will reposition a further 14 stores in major appliance assortment and expanded the stores by major markets across Canada including Vancouver, 25%. Coupled with Canada’s broadest furniture assortment Edmonton, Toronto and Montreal. under one roof, this represents a substantial growth opportunity for us. In the coming year our plans are to Our catalogue business had an exceptional year and was accelerate the growth of this format by tripling the number solidly profitable on a stand-alone basis. Our Christmas of locations. In 1998 we will open Sears Whole Home Wish Book, the biggest ever in our history, was a huge Furniture Stores featuring Sears Brand Central in British success reflecting our commitment to expand our Columbia, Alberta, Ontario and Quebec. merchandise assortments, value and service delivery to millions of customers in some of Canada’s remotest Home services will also play an important role in the communities. future growth of Sears. In this highly fragmented business where reputation is paramount, we are ideally positioned to OFF-MALL STRATEGY EXTENDS OUR PRESENCE serve our customer base via Sears 2,800 repair technicians Our dealer store format now includes 79 locations, an and a network of home improvement and home addition of 19 stores over last year. These stores take the maintenance specialists, together making more than a best of Sears, our strength in merchandise categories like million home visits annually. 4 Sears Canada Annual Report 1997 GIVING CREDIT WHERE IT IS DUE I would like to express my gratitude to Harold Corrigan for The Sears Card is one of the most important ways his contribution to Sears Canada during his 18 years on the we strengthen our relationship with our 8 million Board of Directors and to extend my warmest wishes for customer households. his good health and happiness in his retirement. On a sadder note, Sears Canada would like to reflect on the Our Credit business continues to perform very well and passing of Michel F. Bélanger, a distinguished Director of providing credit is critical to the ability of moderate-income our Company for almost 20 years. families to finance the purchases they require. Our portfolio of charge account receivables is of very high quality and we In addition to Mr. Bélanger’s significant contribution to the enjoy one of the lowest write-off rates in the industry. growth and success of Sears Canada, he also played an important role in the business community and political life While 1997 represents a year of substantial progress for our of Quebec and Canada. He held various positions in the Company on all fronts, we are nevertheless well aware that Provincial Civil Service and was one of the principal we have much work ahead of us. The consumer recovery is architects of the nationalization of Quebec’s hydro-electric still somewhat fragile and our year-over-year comparisons resources and the establishment of Hydro-Quebec. A will now become more difficult. former Chair of the National Bank of Canada, he became We are extremely appreciative and proud of the support well known in the early 1990s when the late Premier we have received from our associate team and from our Robert Bourassa recruited him to serve as Co-Chair of the supplier partners who share our commitment and vision for Bélanger-Campeau Commission on Quebec’s constitutional sustained growth in revenues and earnings.